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June 17, 2009

Sucker’s rally to an end?

European stocks declined for a fourth day signalling fears that the first quarter’s sucker’s rally (as it is very nicely put) is coming to an end. For those who still haven’t understood what a sucker’s rally is, this is that!

Stock prices have risen substantially (some over 80%) over the past 3 months but was this rise justified? Theory says that prices go up when earnings expectations rise. As we are counting almost 2 years into the worst recession of the modern times, I really cannot see how anyone expects earnings to go up. What we do expect and hope is for their (and ours!) debt to go down! And this is what is happening. We have actually funded their debt repayments in a barely disguised stockmarket trap.

How? By being overly optimistic, even though millions of us recently lost their jobs. The strangest thing of all (I need a psychiatrist to explain this, please come forward if you are one!) is that while as taxpayers we still moan about governments using our taxes to bailout the same companies we blaim that bombed the whole economic system up with crap securities…. as investors we have used up any savings left to step our foot in the stockmarket so not to miss out all these eye-popping opportunities (yes, they are not seen or judged as companies anymore; little attention we pay to their balance sheet and other financial statements). So who is to blaim again?

So far so good. Companies are very happy with the results. According to data compiled by Bloomberg, it has been reported that over 165 companies (didn’t specify if they were all American) raised a record $87 billion since the start of the sucker’s rally (beginning of March 2009) in US secondary share sales. What they are doing with all these money is deleveraging, which means repaying as much debt as humanly possible at the earliest possible date. They know that without healthy balance sheets they cannot even start talking about profits!

Another reason, especially true for the banking industry, is that they do not enjoy the loss of control of their business affairs that they have had to agree to in order to get their dirty hands in the Troubled Asset Relief Program (TARP) funds. Who would?! Repaying similar debt would mean that they can go back to the way they are used to doing business.. more or less (supposingly they will be more closely regulated, but this is just in theory).

If you are one the suckers and got stuck in this rally don’t be too hard with yourself. Psychological research has proved that the poorer a person feels, the more likely he will be willing to undertake risk, his only true asset being his hope for a quick turnaround.

So the deeper the recession the more money companies make? I hope not…

Have you or are you looking to invest in stocks?

When do you think it’s the best time to invest?

What’s your exit strategy if any?

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